Jun 17, 2013 04:30 PM IST | Source: CNBC-TV18

Subbarao has hit the nail on its head, says Ambit's Wadhwa

In an interview to CNBC-TV18, Ashok Wadhwa, Group CEO of Ambit Holdings spoke about his reading of the latest RBI credit policy and the road ahead for the Indain economy.

In an interview to CNBC-TV18, Ashok Wadhwa, Group CEO of Ambit Holdings spoke about his reading of the latest RBI credit policy and the road ahead for the Indain economy.

Below is an edited transcript of the interview on CNBC-TV18.

Q: The Reserve Bank has not cut rates and says the very laggardly manufacturing growth can be encouraged only by faster clearances and the government investing. What is your sense; if rate cuts don’t come, will it stymie growth?

A: I personally believe that the governor has hit the nail on the head. We have had a rate cut in the past and it is not as if that rate cut has translated into a significantly larger amount of investment, particularly in the infrastructure and the capital goods sector. We have seen that lack of government decision-making and clarity on what it needs to do on critical elements related to infrastructure are all serious roadblocks at this point in time.

It is not as if more money being available to industry is going to be the sole determinant of higher amount of investment. By making it as specific, the governor has thrown the ball where it belongs and said to the government, "Listen! My ability to reduce rates to some extent is dependent upon your decision-making and honestly even if I was to go and reduce the rates, without decision-making at your end, it is not as if it will translate into any additional investment".

He (RBI governor) has been both prudent and sensible in making that point. We heard the finance minister talk about how the government is evaluating several actions and he hopes to implement and provides clarity on such investment opportunities, whether it relates to foreign direct investment (FDI) or relates to an infrastructure industry. Should some of these happen, over the next few days, clearly July 30 will be a positive outcome. If we see the government dragging its feet, the way it has, the governor has already made his point that do not expect any more rate cuts.


Q: What is the sense you are getting about growth itself? Are you getting a sense that the worst is kind of over because the RBI point out that the purchasing managers’ index (PMI) has started to increase? Also the consumer non-durables is indicating some pick up in the last count when the numbers came in for April. They were up about 8 percent, so they are reading it as probably some indications of an early recovery, would you be convinced at all? Those are the three things they point out, a pick up in the consumer non-durables could be indicative of a fragile return of consumer confidence, on the other hand the services PMI rose in May on order flows as well as of course the onset of the southwest monsoon has been on time, are you seeing the worst over at all? Where do you think they may stabilise in terms of growth at the current levels of about 5 percent or do you think we might do better this year?

A: My own view is we have come through a volatile time. We remain in a volatile time and I do not see the volatility changing dramatically over the next six months. There are some critical factors that can help ease that volatility. A good monsoon obviously so far it has been wonderful. Let us hope that the monsoon continues to be positive. If nothing else, it certainly helps the sentiment, which is so critical at this point of time.

The US Fed is going to make a statement on Thursday and what they write and how they speak about tampering with the Q3 is going to have an impact on the sentiment for sure. Remember, just a hint that there maybe a withdrawal of liquidity in the last statement has resulted in a USD 3 trillion reduction in the market cap across the world. So that is going to be important when it gets stated on Thursday. The measures that the finance minister has announced in terms of improving current account deficit (CAD) and therefore the impact on currency, is going to be critical. So all in all, I would say there are some factors, there are some important issues that will get addressed or at least will give an indication of how the shape of things are to come in the next six weeks. Those things will have determinant effects on the sentiment.

Yes, there are some positive elements coming in but again we have seen over the last six months, these tend to be temporary. We have seen how sentiment has improved and then significantly been withdrawn at short notice in the last few months. So I believe we continue to remain in the same volatile environment for now and for many more weeks to come.

Q: Can the government pretty much spoil the picture for itself if they were to pass the food security act either as an act or as an ordinance, will there be renewed fears of a runaway fiscal deficit, if not in this year in the next year, how much will that spoil sentiment?

A: The fact that it has been discussed debated and at points of time appears inevitable is an overhang. If we continue to see a concern on the overall deficit despite all the assurances that the finance minister gives us and if we still continue to see food inflation unabating at this point of time. It is because everybody recognizes that that bill is bound to be reality -- at some point of time in the near future, the political compulsions to introduce that bill are all very significant. Therefore the overhang of that bill coming in and its consequential impact on food inflation on the one side and on the ability to be able to manage deficit on the other side are twin engines that will hurt the Indian system extremely hard. I believe that if you continue to see a weakening in the sentiment, that overhang is the reason.

Q: We have seen decent amount of FDI coming in, chunks of foreign investment is nevertheless coming in. What is the sense you are getting, will Indian retail and the fundamental consumption story of an economy growing in 5-5.5 percent, will that continue to bring interest?

A: The general sentiment within both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) and in particular within the FDI community is that India is a long-term sustainable story. Given our consumption pattern and the fact that the consumption continues to show sustenance, there is absolutely no denial that from a long-term perspective strategic investors want to continue investing in India. Given that their valuations are more realistic, given that the currency has bid Indian companies cheaper in relative terms obviously is an added attraction.
The problem is volatility in politics on one side and unable to be able to read what will happen in the political scenario going forward, and the consequent effect of that on ability to be able to bring in legislation and policy that is well defined, that is consistent and that is transparent.

We have seen how the whole FDI on retail has become a bit of a football game between two sides. The government tried to introduce legislation and then had to curtain it down to the states which were Congress led recognizing that there is an election and don't know who is going to come in. There is already a treat as to whether existing Congress governments will become BJP governments and what will be the consequence of anybody making an investment in retail at this point of time. And that example itself is a very good demonstration of the lack of transparency and the lack of consistency which is having an overriding factor on reducing the sentiment versus enhancing the sentiment.

Q: What would you bet on in the Indian context? Do you see much more reverses in the stock markets and also where would you hide?

A: I certainly see volatility and therefore there is reason to be very cautious at this point of time. It is just not the Indian scenario. Everything that is happening in the emerging markets is compounded by everything else that is not happening in India right now. So I would argue at that caution is the right word to define how I would look at the Indian markets. I am not saying that there are not stocks out there that at these valuations are attractive, particularly for FIIs as we look at the currency depreciation adding on to the attractiveness of the stocks but I think you are going to see a very slow, very cautious, very careful approach by investors, which effectively means that we are going to remain volatile and within range bound.

Q: Where would you hide? Is there any sector or any instrument, any asset class where you would hide?

A: Since one is dealing with volatility, it will all be liquid and largecaps that are going to be the favours, going up and coming down. In a volatile environment, the last thing that people want to do is get stuck with a stock that is moving down and you cannot exit. So, unfortunately, as always in such situations, midcaps are going to have to suffer more than the largecaps and largecaps are therefore likely to be more visible and attractive.

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